Explosive deterioration of its relationship with Israel. A trip of the post-Arab Spring Middle East. Turkey’s foreign policy is generating quite a lot of attention in the Middle East these days.
Beyond its political implications; however, the policy of courting key Middle Eastern countries like Egypt also has a serious domestic driver: Turkey’s economy is charting precarious waters.
Turkey has been struggling with a rising current account deficit driven by strong domestic demand. The rise in household consumption has been financed by capital from Europe, making Turkey increasingly vulnerable to an outflow of short-term capital as European economies continue to struggle.
The other pillar of Turkey’s economy – exports, is also threatened by the potential of a Eurozone recession. With over 50% of Turkish exports going to the EU, Turkey is particularly vulnerable to a drop in demand from such key countries as Germany, Italy, and Spain. FSG Monitor estimates that a US-EU recession would lead to a 2% drop in Turkey’s GDP in 2012. The projected decline may not be as dramatic as in other countries in the region, but compared to Turkey’s Q1 2011 11.6% GDP growth, followed by 8.8% for Q2 2011 (Turkey had the highest H1 2011 GDP growth in the world), it’s very significant.
In this unstable environment, the Turkish government has announced it will seek to promote export-oriented domestic production. But this strategy will only work if there is enough demand for Turkey’s increased exports. With the European economy in a shaky state, Middle Eastern markets will be increasingly instrumental to Turkey’s economic stability. Currently, the Middle East is the second biggest regional market for Turkish exports, accounting for 20% of the country’s exports, plus another 4.9% of exports going to North Africa.
Turkish businesses are clearly seeing the writing on the wall and are aggressively seeking expanded influence in the Middle East, as evidenced by Prime Minister Erdogan’s large business delegation on his recent trip to Egypt and his promise to increase trade between the two countries to US$5 billion.
In this context, MNCs should expect Turkish competitors to aggressively pursue opportunities in the post-Arab spring markets. As we already discussed, MNCs with overly risk-averse strategies in the region can fall behind regional competitors with a greater risk appetite. It also means, however, that MNCs with Turkish partners can use these relationships in support of strategic expansion in the MENA region, benefitting from the good will Turks are enjoying among the region’s populations and leadership.
In this context, the role of Turkey as a manufacturing hub for the Middle East and North Africa region is becoming increasingly attractive, not just to MNCs but also to the Turkish government itself. As a result, MNCs with local production facilities meant for export to the region are well-positioned to lobby the Turkish government for additional incentives and support.
Latin American executives are reporting lost opportunities and revenue due to increasing trade restrictions on imports into Brazil. Costs and frustrations are mounting for businesses dependent upon a smooth flow of commerce across Brazil’s borders, forcing a reconsideration of previous business models due to critical vulnerabilities to import restriction. In this interview Clinton Carter, Frontier Strategy Group’s Director of Latin America Research, discusses the impact of Brazil trade restrictions on the Latin American region.
Frontier Strategy Group’s Latin American clients are reporting lost opportunities and revenue due to increasing trade restrictions on imports into Brazil. Costs and frustrations are mounting for businesses dependent upon a smooth flow of commerce across Brazil’s borders, forcing a reconsideration of previous business models due to critical vulnerabilities to import restriction.
In a recent example, Argentine auto parts piled up at customs on one side of the Argentine-Brazilian border, and on the other side, Brazilian white goods gathered dust in crates awaiting processing. Skyrocketing demand for appliances went unmet in Argentina, and automakers, already straining to meet production targets for the Brazilian market, missed critical opportunities to capitalize on the country’s boom in car ownership.
At their core, such disputes stem from the imbalances brought on by the persistent strength of the Brazilian real. The strong Brazilian currency is making imports cheaper and threatening the competitive position of Brazilian industry. As the Brazilian real has climbed in value over the last several years, import volume and value has followed, creating competitive pressure on the normally insulated Brazilian industry sector. In response, influential Brazilian industry groups are pressuring the new Dilma administration to restrict imports and protect their businesses. These pressure tactics are bearing fruit, and the government has applied a variety of non-tariff trade barriers such as denial of import licenses and postponement of customs processing.
To illustrate the strategic business implications of this situation, consider that in the first quarter of 2011, in response to the real’s appreciation, 28% of Frontier Strategy Group executive poll respondents reported shifting sourcing to cheaper markets for import of goods into Brazil. Argentina was the primary beneficiary of this business. But Argentina has emerged as the most obvious target for Brazilian import restrictions, as Argentina is also using its own import restrictions, in this case to protect currency reserves from a surge in imports brought on by an overheating economy. The result has been a series of tit-for-tat trade restrictions enacted by the neighbors, paralyzing trade in certain goods and damaging the top line for executives expected to meet meteoric targets for growth in Latin America in 2011. Additionally, it is not just imports from Argentina that are targeted for restriction: increasingly, goods from nations such as China and Mexico are subject to anti-dumping investigations and delays at the border.
In terms of practical steps, Brazil and Latin America-focused executives are advised to identify inputs and products that may be vulnerable to trade restrictions and develop backup sourcing strategies; this is particularly important for at-risk industries such as farm equipment, furniture, footwear, textiles, and auto parts and automobiles. In the meantime, companies may be forced to look at sourcing inside Brazil and compensate for the expensive real through further price increases passed on to customers, traditional financial hedging strategies, and additional resources devoted to government relations and import and export regulation compliance.
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